Stormy markets stir up clouds for winter heating season

SAN FRANCISCO (MarketWatch) -- Heating-fuel consumers struggling to see past the volatility in the energy markets and into the winter season don't know if they should cheer or cry.

Everything that's being factored into the oil market -- particularly the financial turmoil and storm-related disruptions to energy output and refining in the Gulf of Mexico and weakness in demand -- are clouding the outlook for heating fuels.

"It's going to depend on what type of winter we have in store for the country, but if it's going to be as cold as predicted and we're entering into the usage season with a far lower build than expected, we should see both heating oil and natural gas bounce back up into ranges we were trading in just three months ago," said Neal Ryan, a managing partner at Ryan Oil & Gas Partners.

Natural gas and heating oil have a "much greater propensity to be dominated by direct supply/demand data" because of regional usage qualities not necessarily shared by oil, he said.

The concerns in the financial market following the bankruptcy filing by Lehman Brothers
LEH
on Monday could "imply weaker economic growth and thus lower demand" for energy, said Michael Lynch, president of Strategic Energy & Economic Research.

But heating-fuel supplies have been tightening.

Distillate inventories, which include heating oil, fell almost 8 million barrels in three weeks to stand 3.6% below the year-ago level, according to the latest data from the U.S. Energy Department. Natural-gas supplies in storage were 4.6% below their year-ago level.

U.S. heating oil supplies have been shrinking at a time when the market should be looking forward to the winter heating season, said Thomas Hartmann, an analyst at Altavest Worldwide Trading. "So traders will be looking ahead for a potential supply crunch in the coming months."

Supplies of gasoline, too, have been dropping for the past eight weeks, according to government figures. That's "not due to high demand but to lack of production with refinery rates hovering just about 78% of capacity," said Hartmann.

And with refinery activity suffering from delays, they'll try and "ramp up and make enough gasoline for winter before retooling to make heating oil," said Kevin Kerr, editor of Global Commodities Alert at KerrAlert.com.

"They will be way behind and heating oil is last on the list," he said.

Gulf's surprise

As of Wednesday, 12 refineries remained closed due to hurricanes Gustav and Ike, according to the Energy Department. And as of Thursday, about 77.6% of natural-gas production in the Gulf of Mexico was still shut-in, according to the Minerals Management Service.

"With much of the Gulf shut in, stockpiles will likely have dropped substantially," said Mark Waggoner, president of Excel Futures, talking specifically about heating oil and gasoline. Energy prices may start to move higher as "we move toward [the] winter months."

Overall, the energy market is "shocked that production in the Gulf is still mostly offline and will continue to be hampered for the coming months," said Ryan. "While we didn't have infrastructure devastated, the industry still lost platforms, lost drilling rigs, shut in nearly all Gulf production for a month and is just getting started on pipeline inspections," he said on Thursday.

So with the lack of storage additions, "we could potentially enter the winter months and be double digits below usual storage capacity figures," he said. "Only time will tell, but energy is still the place to be."

Flipping over

But there's a flip side to all of this.

"We have to remember that looking at shut-in production is only half the equation," said Ben Smith, president of First Enercast Financial.

"Ike's landing in Houston shut down a tremendous amount of industrial fuels demand," he said. And "outages and evacuations helped reduce energy demand in the region."

'We have to remember that looking at shut-in production is only half the equation.'
Ben Smith, First Enercast Financial

So in the weeks ahead, Smith expects the lower inventory reports from the production shut-ins to be "met with equally low demand figures."

Excel Futures' Waggoner estimates prices for heating oil in the $3.30 to $3.40 range at the end of this year. The October heating oil contract closed at $2.78 per gallon on the New York Mercantile Exchange on Thursday.

Byron King, co-editor of Outstanding Investments, a publication of Agora Financial LLC, expects to see a normalized price of $3.50 for heating oil at the beginning of the heating season.

"It's still more than people are used to paying," he said. "It's not as bad as it could have been."

And natural gas will "remain a relative bargain, compared to oil, other liquid fuels and certainly coal," said King. "Gas is cheap. Supply is good."

Still, some utilities expect consumers to see slightly higher heating bills this winter.

Winter natural gas bills for residential customers at Southern California Gas Co. and San Diego Gas & Electric are forecast to be slightly higher than last year, by 4% and 2%, respectively, according to a Sempra Energy
SRE, +1.13%
spokeswoman.

Waggoner's estimate for natural gas prices at the end of the year is in the $10.50 to $11 range.

The October natural gas contract closed at $7.62 per million British thermal units on Nymex Thursday.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.